Banks: Fed balance sheet normalisation is not causing equity runoff

Author: John Crabb | Published: 1 Feb 2019

Suggestions that the US Federal Reserve’s
balance sheet normalisation programme has forced the recent
equity market selloff have been rejected by a number of banks
and industry participants.

"From the market perspective there is a lot of interest
being paid to the balance sheet as a source of tightening
financial conditions, and as a potential trigger for the equity
selloff that we have seen in recent months and the increase in
volatility," said Matthew Luzzetti, senior economist at
Deutsche Bank.

The claim is that by shrinking its balance sheet of US
treasuries and government-supported mortgage-backed securities
(MBS), the Fed has been drawing liquidity to the system. If
quantitative easing was all about compressing risk premia,
pushing investors off the risk spectrum and pushing flows into
riskier assets, then unwinding the balance sheet should by
definition be the opposite of that. Many would expect that the
term premium would rise...